Constantly increasing standard of living and the rise of the real estate sector have seen the growth of offerings that earlier noted lower adoption. Further, in this age of uncertainty, one can find themselves in an unanticipated financial crisis at any time. This has brought financial offerings that particularly cater to the need for urgent funds to the forefront.
"As per a study1, the demand for Loan Against Property grew 20% during January–June’21, led by Pune, Bangalore, Hyderabad, and Chennai, among Tier I cities and Gurgaon, Jamshedpur, and Patna, among Tier II cities."
Two such offerings that have gained popularity in the recent past are loans against property and business loans. Naturally, this begs the question – which one is better? Is LAP better than business loan? If yes, why?
Before we jump to a comparison between a loan against property and a business loan, let’s understand each of these a little better.
A loan against property is a loan availed of by keeping a property as a mortgage. In this type of loan, the lender has the borrower's property as security; therefore, a loan against property is considered a secure loan. There are a few things borrowers must know about Loan Against Property, or LAP.
First, the amount availed of under LAP depends primarily on the value of the property mortgaged and the applicant’s profile, which further depends on his/her employment status, income stability, and credit history. Second, LAP can be availed of against both commercial and residential properties. However, the property to be mortgaged must be free of any legal dispute. Third, the funds availed of under LAP can be used for any purpose. One can use the money to finance the education of their children, undertake a business expansion project, or even refurbish their home.
Business loans are loans given specifically to meet business-related financial needs. For instance, one can avail of a business loan to expand their business or buy machines and equipment. Business loans are unsecured loans, i.e., banks and NBFCs do not ask for collateral or security while approving a business loan.
Now that we have developed some understanding of the two types of loans, let us settle the debate on Loan Against Property vs Business Loan.
Here are some of the reasons why a LAP is better than a business loan.
Lower Interest Rates
LAP loans are secured loans. Lenders keep a borrower's property as security until they have paid off the entire loan amount. Therefore, in the case of LAP, there is minimum risk involved for the lender. It is for this reason that lenders charge a lower interest rate on LAP loans. On the other hand, business loans are unsecured loans that put lenders at a higher risk. Therefore, business loans draw a higher rate of interest than LAP loans.
Yet again, since LAP loans are secured loans, one can avail of these loans for a longer tenor. In general, most lenders allow borrowers to let their LAP loans run for up to 20 years. On the other hand, lenders allow borrowers to keep a tenor of up to 7 years in the case of a business loan. These figures may vary from lender to lender, but the allowed tenor for LAP loans is generally longer than that for business loans.
No End-Use Restriction
The most important reason why the business loan vs LAP debate settles in the favour of latter is that there is no end-use restriction on the funds availed of under LAP. One can use the money borrowed for any purpose – to meet wedding expenditures, pay for medical emergencies, undertake business expansion, etc. Business loans, on the other hand, come with the restriction that the money availed of can only be used to meet business-related expenses.
In conclusion, a loan against property is the ideal way to arrange money when a borrower is in urgent need of liquidity. If you are planning to apply for a loan against property, know that Bajaj Housing Finance offers one of the lowest interest rates on LAP loans, with disbursal in 72 hours* from the time of document submission.
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Last update on 11-Mar-2021
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